1 Michael D. Braun (CSB #167416)STULL, STULL & BRODY

2 10940 Wilshire Boulevard cSuite 2300

3 Los Angeles, CA 90024

(310)209-2468 44 _ zJules Brody5 Michael Swick

STULL, STULL & BRODY6 6 East 45th Street

New York, New York 100177 (212) 687-7230

C.

8 Attorneys for Plaintiffs 1 7'1:1

9

10 UNITED STATES DISTRICT COURT

11 CENTRAL DISTRICT OF CALIFORNIA

12 SOUTHERN DIVISION

13 SACV`a -3 r6/AHS(4:1914 ROBERT VALENTI, on behalf of himself CASE NO.

and all others similarly situated,15 CLASS ACTION COMPLAINT FOR

Plaintiff, VIOLATION OF FEDERAL16

SECURITIES LAWSv.

17

JURY TRIAL DEMANDED COLETTE COZEAN, MICHAEL

18 BIEBERT, and PREMIER LASERSYSTEMS, INC.,

19Defendants.

20

ye 21 Plaintiff, as and for his complaint, alleges the following upon personal knowledge as to

22 himself and his own acts. All other allegations are based, inter alia, on the investigation conducted

23 by his attorneys, including a review of public filings of defendant Premier Laser Systems, Inc.

24 ("Premier" or the "Company"), reports, press releases and articles pertaining to Premier.

25

26 NATURE OF THE ACTION

27 1. This is a class action on behalf of all purchasers of the common stock of Premier Laser

28 Systems, Inc., between February, 12, 1998, and April 15, 1998, inclusive,(the "Class Period"), seeking

s

ENTEREU ON ICMS /IA/

1 to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act"). The class action

2 claims complain of a fraudulent scheme and deceptive course of business that injured purchasers of

3 Premier stock during the Class Period. By failing to disclose material information, and making material

4 misrepresentations regarding the business operations and sales growth figures, reported earnings per

5 share and reported revenues and future prospects, the Company was able to artificially inflate the price

6 of its stock during the class period long enough to allow the Company to report its first ever quarter of

7 profits, and then to trade on this report by effectuating the acquisition of Ophthalmic Imaging Systems

8 ("OIS"), which Premier purchased, in part, using Premier's artificially inflated stock as currency.

9 2. However, soon after the OIS merger the Company disclosed that in fact, it had not

10 achieved record growth or profits, and that it had artificially inflated its sales figures, revenues and

11 earnings by booking as sales, orders which were actually shipments to Premier's marketing partner -

12 Henry Schein - who was a reseller of Premier products, and not a customer. Since Schein did not sell

13 the Premier products within Premier's fiscal third quarter, as represented by the Company, Premier was

14 ultimately forced to restate its previously reported record third quarter financial results, and take a

15 substantial and material charge in its fourth quarter of fiscal 1998. The result of the restatement and

16 write-down was a precipitous drop in the Company's stock, which caused substantial injury to

17 shareholders.

18

19 JURISDICTION AND VENUE

20 3. This Court has jurisdiction of this litigation under Section 27 of the Securities Exchange

21 Act of 1934 (the "Exchange Act"), 15 U. S.C. Section 78aa.

22 4. The claims herein arise under Sections 10(b) and 20(a) of the Exchange Act, 15 U. S.C.

23 Sections 78j(b) and 78t(a) (hereinafter cited only to the provisions of the Exchange Act) and Rule 10b-5

24 promulgated thereunder by the Securities and Exchange Commission ("SEC") (17 C.F.R. Section

25 240.10b-5).

26 5. Venue is properly laid in this district pursuant to Section 27 of the Exchange Act and 28

27 U. S .C. Section 1391(b). Premier has offices located in this district and many violations of law

28

2

•

1 complained of herein occurred in this district, including the preparation and dissemination of statements

2 alleged herein to be materially false and misleading.

3 6. In connection with the conduct complained of herein, defendants, directly or indirectly,

4 used the means and instrumentalities of interstate commerce, including the mails and interstate telephone

5 communications and the facilities of a national securities exchange.

6

7 PARTIES

8 7. Plaintiff Robert Valenti, as set forth in the accompanying certification, which is

9 incorporated herein by reference, purchased Premier common stock at artificially inflated prices during

10 the Class Period and has been damaged thereby.

11 8. Defendant Premier Laser Systems, Inc., is a California corporation with its principal office

12 located at 3 Morgan Drive, Irvine California 92618. Premier develops, manufacturers and markets

13 several lines of proprietary medical lasers, fiber optic delivery systems, corneal topography systems and

14 services for a variety of dental, ophthalmic, dermatologic and surgical applications.

15 9. Defendant Colette Cozean ("Cozean") is, and at all relevant times has been, Chairwoman

16 of the Board of Directors, President and Chief Executive Officer, and a Director of the Company.

17 10. Defendant Michael Hiebert ("Hiebert") is, and at all relevant times has been, Chief

18 Financial Officer, Principal Financial Officer and Principal Accounting Officer of the Company.

19 11. The persons named in paragraph 9-10 above shall be collectively referred to herein as the

20 "Individual Defendants."

21

22 CLASS ACTION ALLEGATIONS

23 12. Plaintiff brings this action as a class action pursuant to Rules 23(a) and (b)(3) of the

24 Federal Rules of Civil Procedure on behalf of all persons (the "Class") who purchased or otherwise

25 acquired Premier common stock from February 12, 1998, to April 15, 1998 (the "Class Period").

26 Excluded from the Class are the defendants, the subsidiaries, affiliates, officers, and directors of Premier;

27 the heirs and the members of the immediate families of the Individual Defendants; and the successors or

28 assigns of any defendants.

3

1 13. The members of the Class are so numerous that the joinder of all members is impractical.

2 While the exact number of Class members is unknown to plaintiff at this time and can only be ascertained

3 through appropriate discovery, plaintiff believes that there are at least thousands of members of the

4 Class. As of February 12, 1998, there were 14,814,523 shares of Premier Class A common stock

5 outstanding, which were traded in an open and efficient market on the NASDAQ Stock Exchange.

6 14. Plaintiff's claims are typical of the claims of the other members of the Class, and plaintiff

7 and all members of the Class sustained injuries arising out of defendants' wrongful conduct complained

8 of herein.

9 15. Plaintiff will fairly and adequately protect the interests of the members of the Class and

10 has chosen counsel experienced in class action securities litigation. Plaintiff has no interests antagonistic

11 to, or in conflict with, the other members of the Class he seeks to represent.

12 16. The questions of law and fact common to the other members of the Class, and which

13 predominate over any questions affecting individual members are, inter alia:

14 (a) Whether the federal securities laws were violated by defendants' acts as alleged

15 herein;

16 (b) Whether documents, releases and/or statements disseminated to the investing

17 public and Premier shareholders during the Class Period omitted and/or misrepresented material facts

18 about the business and financial condition of the Company;

19 (c) Whether defendants made materially misleading statements during the Class

20 Period about the business and financial condition of the Company;

21 (d) Whether the defendants acted knowingly and/or recklessly in making materially

22 false statements and omitting material facts about the business and financial condition of the Company;

23 (e) Whether the market price of the Company's common stock was artificially inflated

24 during the Class Period due to the non-disclosures and/or material misrepresentations complained of

25 herein; and

26 (f) Whether the members of the Class have suffered damages and, if so, what is the

27 proper measure of damages.

28

4

•

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1 17. A class action is superior to all other available methods for the fair and efficient

2 adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

3 damages suffered by the plaintiff or any other individual Class member may be relatively small, the

4 expense and burden of individual litigation make it impossible for the Class members individually to

5 redress the wrongs done to them. Plaintiff anticipates no difficulty in the management of this action as

6 a class action.

7

8 PARTICIPATION OF INDIVIDUAL DEFENDANTS

9 18. The Individual Defendants participated in the drafting and preparation of the various

10 public (shareholder reports) and other communications complained of herein and were aware of the

11 misstatements contained therein and omissions therefrom, and were aware of their materially misleading

12 nature. Because of their board membership and/or executive and managerial positions with Premier, the

13 Individual Defendants had access to the adverse non-public information about Premier's business

14 prospects and financial condition. The Individual Defendants, by reason of their stock ownership,

15 management positions, and/or membership on Premier's Board of Directors, were controlling persons

16 of Premier and had the power and influence, and exercised the same, to cause Premier to engage in the

17 illegal practices complained of herein.

18

19 CONTROL OF INDIVIDUAL DEFENDANTS

20 19. The Individual Defendants, because of their positions of control and authority as officers

21 and/or directors of the Company, were able to and did control the contents of the various quarterly

22 reports, SEC filings and press releases pertaining to the Company. The Individual Defendants were

23 provided with copies of Premier's press releases and SEC filings after their issuance, with the opportu-

24 nity to cause them to be corrected. Because of their board membership and/or executive and managerial

25 positions with Premier, the Individual Defendants and Premier had access to the adverse non-public

26 information about Premier's business and finances particularized herein. As a result, the Individual

27 Defendants were responsible for the accuracy of the public reports and releases detailed herein as "group

28

5

1 published" information, and is therefore responsible and liable for the representations contained therein

2 under Section 20(a) of the Exchange Act.

3 20. The Individual Defendants either knew or recklessly disregarded the fact that the illegal

4 acts and practices and misleading statements and omissions described herein would adversely affect the

5 integrity of the market for Premier common stock and would artificially inflate or maintain the prices of

6 those securities. Each of the defendants, by acting as herein described, did so knowingly or in such a

7 reckless manner as to constitute a fraud and deceit upon plaintiff and the other members of the Class

8 who plaintiff seeks to represent.

9

10 BACKGROUND

11 21. Premier develops, manufactures and markets several lines of proprietary medical lasers,

12 fib eroptic delivery systems and associated products for a variety of dental, ophthalmic and surgical

13 applications. The Company commenced operations in August 1991, after acquiring substantially all of

14 the assets of Pfizer Laser Systems ("Pfizer Laser"), a division of Pfizer HPG which is a wholly-owned

15 subsidiary of Pfizer, Inc. The assets acquired by the Company included the proprietary rights to a broad

16 base of laser and fiberoptic technologies developed by Pfizer Laser. This acquisition was led by the

17 Company's current Chief Executive Officer.

18 22. Since its formation and until its initial public offering in December 1994, the Company

19 principally focused its research and development activities on growing markets in dentistry,

20 ophthalmology, cosmetic procedures and certain surgical specialties. To implement this strategy, the

21 Company began a process of developing, acquiring and introducing laser systems. In February of 1992,

22 the Company developed and introduced the Pegasus Nd:YAG dental laser system. In June 1993, the

23 Company introduced the Centauri Er:YAG laser for ophthalmology and initiated clinical trials for hard

24 tissue procedures in dentistry. In December 1993, the Company acquired from Proclosure certain

25 technology, assets and proprietary rights relating to a 1.32 Nd:YAG laser system for tissue melding. By

26 the time the Company went public in December 1994, it had developed and received regulatory

27 approvals for 15 models of lasers and sold certain of those products for soft tissue applications in

28 dentistry and as part of clinical trials conducted by third parties.

6

1 23. After the Company's initial public offering in December 1994 (the "EPO") , the Company

2 increased its inventory, acquired the distribution rights to two new dental lasers and, in December 1995,

3 expanded its dental sales force. In September and November 1995, the Company acquired rights to

4 market and distribute the Arago and MOD argon lasers, respectively, for dental applications, and in

5 February 1996, the Company introduced and began shipping its Aurora diode laser for soft tissue dental

6 applications. The Company completed a secondary offering in October 1996. In April 1997, the

7 Company entered into an agreement to acquire EyeSys Technologies, Inc. -- a leading developer and

8 supplier of corneal topography (diagnostic imaging) systems with an installed base of more than 3,500

9 systems worldwide.

10 24. On May 7, 1997, the Company gained national prominence when it announced that it was

11 the first Company in the U.S. to receive FDA clearance to market laser products that can be used in hard

12 tissue procedures, such as the removal of tooth decay and cavity preparation. According to the

13 Company, the FDA granted approval for the use of the Centauri Erbium Yttrium Aluminum Garnet

14 ("YAG") laser which can be used in an estimated 170 million procedures annually in the U.S. The

15 advantage of using the Centauri YAG laser over traditional methods of dentistry in treating tooth decay,

16 is that the laser causes patients little or no pain or discomfort, and therefore eliminates the need for

17 anesthesia or needles. In addition, patients will no longer hear a high-speed drill, nor feel its vibrations.

18 The Company estimated that it would be able to sell from 10,000 to 15,000 Centauri YAG laser systems

19 within the next 10 years, each with a total cost of about $40,000.

20 25. Notwithstanding this growth, the Company recorded operating losses in each of the fiscal

21 years since its formation, resulting principally from substantial costs incurred in research and

22 development activities and obtaining regulatory approvals, together with the absence of significant

23 revenues and limited commercial sales of its products. According to the Company's Form 10-K for the

24 fiscal year ended March 31, 1997, the Company recorded a net loss in that year of $5 6 million, or $0.96

25 per share, following a loss of $5.8 million, or $1.26 per share for the prior year period.

26 26. On January 6, 1998, Premier issued a press release, published on the Business Wire, in

27 which it announced that it had finalized a Letter of Intent with Melville, N.Y. - based Henry Schein Inc.

28 ("Schein"), to market and distribute Premier's dental laser products. According to the press release the

7

1 "non-exclusive agreement involve[d] the domestic sales of four models of lasers for the dental market."

2 Those models include the Centauri YAG laser system for use in decay removal, cavity preparation and

3 related dental hard tissue procedures; the Arago and MOD lasers for composite curing and teeth

4 whitening procedures; and the Aurora laser for soft tissue (gum) surgery. According to the press

5 release, Henry Schein is the largest distributor of dental products in the world with annual sales of over

6 $1 billion. Schein operates worldwide with a dental sales force of more than 500, and a technical

7 support staff of more than 400 individuals.

8 27. On January 16, 1998, the Company announced that it had completed the redemption of

9 its Class A Warrants.' During the warrant call period 2 2 million warrants, or approximately 99% of the

10 outstanding Class A Warrants were exercised, resulting in gross proceeds to the Company of more than

11 $14.3 million.

12

13 SUBSTANTIVE ALLEGATIONS

14 The Materially False and Misleading Statements

15 28. On February 12, 1998, the beginning of the Class Period, Premier issued a press release,

16 published on the Business Wire, in which the Company announced its first ever profitable quarter.

17 Premier announced that revenues for the third fiscal quarter, ended December 31, 1997, rose 480% from

18 the previous year to a record $7.2 million, due in major part to the Company's dental lasers - including

19 Centauri, Arago and Aurora lasers. According to the announcement, the Company reported its first

20 quarterly profit with net income of $0 5 million, or $0.04 per share. For the third quarter of the previous

21 fiscal year, the Company had revenues of $1 5 million with a net loss of $979,342, or a $0.15 loss per

22 share. For the nine months ended December 31, 1997, the Company's revenues were $12.3 million.

23 Excluding costs associated with the previous acquisition of EyeSys Technologies, the Company's net

24

25

26

27'On December 5, 1997, Premier had called its Class A Warrants to be exercised no later than January

28 5, 1998. According to the Company the Warrants had an exercise price of $6.50.

8

1 loss for nine months was $0 9 million or an $0.08 loss per share. In reaction to the news, defendant

2 Cozean stated:

3 Much of the focus of attention at Premier Laser continues to be on the Centauri Er:YAG

4 laser for cavity preparation. Dentists are purchasing Centauri in increasing numbers. and

5 being trained to use lasers in significantly larger numbers, which bodes well for the

6 future.

7 29. On February 18, 1998, Premier filed with the SEC its Form 10-Q for its fiscal third

8 quarter, ended December 31, 1997, signed by defendant Hiebert. As previously announced, the

9 Company reported that revenues for the third fiscal quarter increased approximately 486% from the

10 previous year, to a record $7.2 million. According to the third quarter Form 10-Q, the Company

11 reported its first quarterly profit with net income of $0 5 million, or $0.04 per share. For the third

12 quarter of the previous fiscal year, the Company had revenues of $1.437 million, or $0.15 loss per share.

13 Net sales for the nine month period ended December 31, 1997, increased approximately 217% to $12.32

14 million from $3.89 million from the nine month period ended December 31, 1996. The Company's gross

15 profit for the 1997 quarter and nine month period was $3,313,000 and $5,385,000 respectively,

16 compared to a gross profit of $538,000 and $1,178,000 in the 1996 quarter and nine month period

17 respectively. Gross profits increased 46% in the third quarter of 1997 versus the prior year. The

18 Company reported that this increase was due primarily to decreased material costs for each laser

19 resulting from volume ordering among other things

20 30. Additionally, the Company's third fiscal quarter Form 10-Q contained the following

21 representations:

22 In the opinion of the Company's management, the accompanying unaudited

23 condensed consolidated financial statements include all adjustments (which include only

24 normal recurring adjustments) necessary for a fair presentation of the financial positions

25 and cash flows for the nine months ended December 31, 1997 and 1996.

26 * * *

27

28

9

1 The financial information in this quarterly report should be read in conjunction

2 with the March 31, 1997 consolidated financial statements and notes thereto included in

3 the Company's Annual Report on Form 10-Q (as amended) for the fiscal year ending

4 March 31, 1997.

5 The Company's revenue recognition policy was reported in the Company's Annual Report on Form

6 10-Q for the fiscal year ended March 31, 1997, and was incorporated by reference into the third fiscal

7 quarter Form 10-Q, as follows:

8 REVENUE RECOGNITION

9 Revenues_izect when products are shipped to customers.

10 31. The statements made by the Company as reported in paragraphs 28, 29 and 30 above

11 were materially false and misleading, and were known by defendants to be materially false and misleading

12 at the time they were made, or were recklessly disregarded as such, for the following reasons:

13 (a) the Company had overstated its revenues, income, and earnings per share during

14 the Class Period, in violation of General Accepted Accounting Principles ("GAAP"), and the Company's

15 own revenue recognition policy as disclosed in Premier's 1997 Form 10-K, incorporated by reference

16 into the Company's third quarter Form 10-Q, by booking sales when products were shipped to its

17 marketing partner, Henry Schein a dental products distributor, and not waiting until the products reached

18 the Company's customers. Evidence that Premier knew that the shipments to Schein were not sales was

19 the fact that Schein did not issue purchase orders for the products which Premier shipped to Schein

20 during Premier's fiscal third quarter, and Premier did not send invoices to Schein for these products, each

21 of which are standard business practices in the dental products industry for products which are sold;

22 (b) the Company also failed to disclose that as a result of booking shipments to

23 Schein as sales, the Company would have to materially restate its third quarter results, and take material

24 charges in the following quarter, which would not allow the Company to record its first ever quarter of

25 earnings, but in fact, would require the Company to report another in a long string of quarterly losses;

26 and

27 (c) the Company failed to disclose that as a result of booking shipments to Schein

28 as sales before such products were sold to customers, all adjustments had not been made as was necessa-

10

1 ry for a fair presentation of the financial positions and cash flows for the nine months ended December

2 31, 1997 and 1996, as represented in the Company's fiscal third quarter Form 10-Q.

3 32. On February 26, 1998, Premier issued a press release, published on the Business Wire,

4 in which it announced that it had acquired a 51% interest in Ophthalmic Imaging Systems ("OIS"),

5 through private purchases of OIS stock (previously, Premier purchased approximately 29.5% of the

6 outstanding common stock of Ophthalmic in open market transactions). As part of the acquisition,

7 Premier agreed with OIS that Premier would commence a tender offer within five business days to

8 acquire the remaining outstanding shares of OIS. Pursuant to the tender offer, in return for each share

9 of OIS, Premier tendered $1.75 in cash and $0.25 worth of stock and two warrants, each of which

10 permit the holder to acquire $0.25 worth of stock for a nominal purchase price if OIS meets certain

11 future revenue goals.

12 33. On March 9, 1998, Premier filed with the SEC a Form 8-K in which the Company

13 reported the terms of its acquisition of OIS, as follows:

14 On February 25, 1998, Premier Laser Systems, Inc., a California corporation ("Premier")

15 entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with

16 Ophthalmic Imaging Systems, a California corporation ("Ophthalmic" or "OISI"),

17 wherein, among other things Premier agreed to make an offer to all Ophthalmic

18 shareholders with a view to acquiring Ophthalmic and Ophthalmic agreed to recommend

19 Premier's offer and not to solicit any acquisition proposals competing with Premier's

20 proposal....

21 Under the Stock Purchase Agreement, Premier is committed to offering each Ophthalmic

22 shareholder, in exchange for each Ophthalmic share, $1.75 per share in cash, $0.25 in

23 valueineasila in the Stock;tock Purchase Agreement) of Premier Class A

24 Common Stock, one Class C Warrant and one Class D Warrant (collectively, the

25 "Warrants"), each exercisable for fractional shares of Premier Class A Common Stock

26 having a value (at the measurement dates) of $0.25, but with the exercisability of such

27 Warrants dependent on the achievement of certain sales targets for Ophthalmic products.

28 * * *

11

1 In connection with Premier's purchase of 980,360 shares of OIS common stock,

2 1,960,720 warrants to purchase additional shares of Premier common stock were issued.

3 The warrants become exercisable in two equal increments in 1998 and 1999 only in the

4 event that net sales of qualified products, as defined, exceed certain defined amounts for

5 each period. In the event that the sales targets are achieved for both years, additional

6 purchase price of $490,000 would be recorded as an increase to goodwill. . .

7 Additionally, in the Form 8-K, Premier republished its financial results for the nine month period ended

8 December 31, 1997. Again the Company reported revenues for this period, including the record

9 breaking third quarter results, of $13,407,609 with a gross profit of $5,597,076.

10 34. The statements made in paragraph 33 above were false and misleading, and were known

11 by defendants to be false and misleading at the time they were made, or were recklessly disregarded as

12 such, for the reasons stated in paragraph 31. However, because the Company was planning on using

13 its artificially inflated stock and warrants as currency to purchase OIS, the Company continued to

14 mislead the investing community by failing to make an adequate disclosure as required by law.

15 35. On March 23, 1998, the Company issued a press release, published on BW HealthWire,

16 in which it announced that it had expanded the terms of its agreement with Schein. According to the

17 press release, the Company announced that at the 1998 Chicago Dental Society Mid-Winter Meeting,

18 Schein, the world's largest dental products distributor, signed a "broadened agreement" whereby

19 it would begin to distribute Premier's dental laser products in Canada, Germany, Spain, France, Mexico

20 and South America. Additionally, Premier announced that at the Meeting, the two companies together

21 booked more than $500,000 in system orders from U.S. and foreign-based practitioners. Defendant

22 Cozean was quoted in part as follows:

23 The Company's overall positive experience at the internationally attended dental meeting

24 [was] one of the deciding factors in signing the expanded agreement on the spot.

25 36. The statements contained in the March 23, 1998, press release were materially false and

26 misleading, and were known to defendants to be materially false and misleading at the time they were

27 issued, or recklessly disregarded as such, because Premier had failed to disclose that certain material

28 elements of the Schein-Premier distribution agreement had not been fully negotiated between the parties.

12

( I

I Therefore it was false and misleading to claim on March 23 that a "broadened agreement was signed"

2 when material elements of that agreement were not consented to by both parties. A press release,

3 subsequently issued on April 15, 1998, would ultimately show how far the parties were from any

4 significant agreement.

5 37. On April 15, 1998, the Company issued a press release, published on the Business Wire,

6 which shocked the market. In a statement which was in no way foreshadowed by the Company's

7 previous announcements, the Company revealed that Schein had notified Premier that it would not pay

8 for up to $7 million in lasers which Premier had booked as sales in the third and fourth quarters of fiscal

9 1998. The press release stated, in part, the following:

10 The Board met last night following the identification of irreconcilable differences during

11 negotiations in Melville on Monday, April 13, 1998; the talks were indefinitely postponed

12 Tuesday afternoon, April 14, 1998. Schein notified Premier that it would not take a

13 previously expected $4 4; million in dental lasers and associated disposables during

14 Premier's fiscal fourth quarter ended March 31, 1998, and disputes an order shipped

15 during the fiscal third quarter ended Dec. 31, 1997. It also notified Premier that Schein

16 prefers that any future orders be placed on a fully contingent basis, contrary to Premier's

17 understanding of the terms in a letter of intent signed by Schein in December. At the

18 time of the notification, most of the $4 5 million in intended fourth-quarter products had

19 already been manufactured and placed in inventory to meet the expected sales. Premier

20 now anticipates that it may be required to restate results for the third quarter, which

21 would then show revenues of approximately $4.7 million after subtracting the $2.5

22 million of disputed orders. Premier also anticipates that revenue for its fiscal fourth

23 quarter will be approximately $4.5 million lower with a substantial negative effect on net

24 results.

25 38. Apart from shocking the market by finally disclosing the reality that $2.5 million in lasers

26 shipped to Schein were not sales, but merely shipments to its distributor, the April 15, 1998, press

27 release was also materially false and misleading in that it directly contradicted earlier statements made

28

13

,

1 by the Company regarding the Schein agreement. On April 15, 1998, in the Premier press release, the

2 Company was now claiming that the Schein agreement was an "exclusive" sales agreement:

3 [Premier] had reduced its own sales force in reliance on the expected Schein sales and

4 had refrained from signing additional distributors and shipping to them due to Schein's

5 expressed desire for exclusivity in the dental laser marketplace until mid-1998.

6 This statement is in direct contradiction of the previously announced (January 8, 1998) agreement which

7 stated that the Schein-Premier agreement was not exclusive.

8 39. On the same day, Henry Schein responded to Premier's press release by issuing its own

9 press release published on the PR Newswire:

10 Any claims made by Premier Laser Systems, Inc. against Henry Schein, Inc. would be

11 entirely unwarranted and without merit. The facts confirm that Henry Schein did not

12 issue a purchase order for the products which Premier claims were sold during Premier's

13 fiscal third quarter, nor did Premier send an invoice to Henry Schein for these products,

14 each of which are standard business practices in our industry; and accordingly, there

15 cannot be a valid claim against Henry Schein. It is unfortunate given our marketing

16 efforts with respect to these products that Premier felt it had to pursue this avenue.

17 Should a resolution not be reached, Hem-y Schein will vigorously defend any legal action.

18 Stanley M. Bergman, Chairman, Chief Executive Officer, and President of Henry Schein, Inc.,

19 commented:

20 We are quite perplexed by these recent events. Henry Schein prides itself on its excellent

21 relationships with manufacturers and has never had this kind of dispute with any of our

22 supplier partners.

23 40. On April 15, 1998, as a result of the disclosure of the truth concerning Premier's financial

24 condition and actual sales figures, on April 15, 1998, the price of Premier stock which had traded as high

25 as $11.81 on March 8, 1998, traded as low as $6.50 per share, representing a decline over the Class

26 Period of almost 45%, and a one day decline from the prior days' high, of approximately 26%.

27 41. In ignorance of the adverse facts concerning Premier's true business and financial

28 condition, which were concealed by defendants, plaintiff and the other members of the Class purchased

14

1 Premier common stock at artificially high prices, relying upon the statements made and/or upon the

2 integrity of the market and were damaged thereby.

3 42. Had plaintiff and the other members of the Class known of the materially adverse

4 information not disclosed by the defendants they would not have purchased Premier common stock at

5 the artificially inflated prices that they did.

6

7 VIOLATION OF GENERAL ACCEPTED ACCOUNTING PRINCIPLES & STANDARDS OF ACCOUNTING

8

9 43. In order to inflate the price of Premier's stock, the Company reported the results for the

10 third quarter of fiscal year 1998, through improper revenue recognition, by booking as sales the shipment

11 of products designated for distribution through the Company's marketing partner, Henry Schein. The

12 fact that the goods shipped to Schein were done so without purchase orders or invoices only confirms

13 that Premier knew, or recklessly disregarded, that Schein would not pay for products unless those

14 products were sold to Schein's customers. By recording the shipments to Schein as sales, Premier

15 materially overstated its revenues, net earnings and earnings per share throughout the Class Period.

16 Ultimately, Premier admitted that its results had been overstated, and revealed that it would restate its

17 third quarter fiscal 1998 results to eliminate up to $2 5 million in previously reported revenue, over 37

18 percent of the revenue previously reported in that quarter. Absent this improper revenue recognition,

19 Premier would have reported a loss for every quarter of its existence, instead of the record setting, first-

20 ever quarter of profits as it reported during the Class Period.

21 44. Premier included in its fiscal third quarter 1998 Form 10-Q, filed with the SEC on

22 February 18, 1998, signed by defendant Hiebert, the following representation:

23 In the opinion of management, the accompanying unaudited condensed financial

24 statements include all adjustments (which include only normal recurring adjustments)

25 necessary for a fair presentation of the financial position of the Company at December

26 31, 1997 and the results of operations and cash flows for the nine months ended

27 December 31, 1997 and 1996.

28

15

1 This representation was materially False and misleading when made, as Premier's financial statements for

2 the Class Period were not a fair presentation of Premier's results and were presented in violation of

3 GAAP, SEC rules, and the Company's own revenue recognition policy.

4 45. Premier included in its Annual Report for 1997, reported on Form 10-K, filed with the

5 SEC on May 28, 1997, signed by defendants Cozean and Hiebert, among others, and incorporated by

6 reference into Premier's third quarter Form 10-Q, the following representation regarding the Company's

7 revenue recognition policy:

8 REVENUE RECOGNITION

9 Revenues are recognized when products are shipped to customers.

10 This representation was materially false and misleading when incorporated into the Company's third

11 quarter Form 10-Q, as the Company had fraudulently recorded over $2 5 million in revenues, shipments

12 of goods which were not to "customers," but actually shipments to the Company's marketing partner.

13 The Company knew that these shipments were not sales and never invoiced them as such. As a result

14 of this improper revenue recognition Premier's results and were presented in violation of GAAP, SEC

15 rules, and the Company's own revenue recognition policy.

16 46. GAAP are those generally accepted principles recognized by the accounting profession

17 as the conventions, rules and procedures necessary to define accepted accounting practice at a particular

18 time. SEC Regulation S-X (17 C.F.R. ss210.4-01(a)(1)) states that financial statements filed with the

19 SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate,

20 despite footnote or other disclosure. Regulation S-X requires that interim financial statements must also

21 comply with GAAP, with the exception that interim financial statements need not include disclosure

22 which would be duplicative of disclosures accompanying annual financial statements. 17 C.F.R. ss

23 210.10-01(a).

24 47. Premier falsified its reported financial results through its improper revenue reco nition

25 on Premier's shipments of dental lasers and equipment to its distributor, Henry Schein, while Schein was•

26 not under any obligation to pay For the Premier products, unless and until those products were sold to

27 Schein's customers. Pursuant to GAAP, Premier should have deferred recognition of revenue on such

28

16

1 shipments until the sales had been consummated and products shipped to customers, complete with

2 purchase orders and invoices, but did not in order to inflate its reported results.

3 48. First, according to generally accepted principles of accounting, Premier had no

4 justification to record the $2 5 million in revenues from shipments to Schein in the third quarter of fiscal

5 1998, prior to earning or realizing these revenues. Under FASB Concepts Statement ("SFAC") 5,

6 "before revenue is recognized in financial statements, the conditions of being earned and realized

7 (realizable) must be met."

8 [a] Earned. Revenues are earned when an entity has substantially accomplished

9 what it must do in its ongoing or central operations (i.e. its earning process) to be

10 entitled to the benefits represented by the revenues. . .

11 [b] Realized or Realizable. Revenues and gains are realized or realizable when

12 products (goods and services), merchandise, or other assets are exchanged for cash, or

13 for claims to cash or other assets that are readily convertibles hit known amounts of cash

14 or claims thereto. Readily convertible assets are those that have interchangeable or

15 fungible units, quoted prices, and are available in an active market that can readily absorb

16 the quantity held by the entity without significantly affecting the price.

17 49. Since the $2 5 million shipment to Schein was not "earned" in the third quarter of fiscal

18 1998, as the shipments did not "entitle Premier to the benefits represented by the revenues," and since

19 such revenues were not properly realized or realizable by Premier, since its assets were not "exchanged

20 for cash or claims to cash or other assets..." Premier was not justified in recording as sales the $2.5

21 /-

22 /-

23 /-

24

25

26

27

28

17

1 million in the third fiscal quarter. 2 Pursuant to GAAP, Premier should have deferred recognition of

2 revenue on such shipments, but did not in order to inflate its reported results.

3 50. Second, even if one were to consider the sales to Schein as sales with a right of return,

4 which they were not, Premier was still unjustified in recording such sales as revenues in the third fiscal

5 quarter of 1998. According to GAAP, FASB Statement of Accounting Standard ("SFAS") No. 48,

6 Revenue Recognition When Right of Return Exists, prohibits the recognition of revenue when the right

7 of return exists unless certain conditions are met. SFAS No. 48 applies to transactions "in which a

8 product may be returned, whether as a matter of contract or as a matter of existing practice." SFAS No.

9 48 §3. SFAS No. 48, §6 states in part:

10 6. If an enterprise sells its products but gives the buyer the right to return

11 the product, revenue from the sales transaction shall be recognized at time of sale only

12 if all of the following conditions are met:

13 b. The buyer has paid the seller, or the buyer is obliged to pay seller

14 and the obligation is not contingent on resale of the product.

15 51. Under SFAS No. 48 Premier had improperly recorded $2 5 million in revenue in the third

16 quarter of fiscal 1998 since Schein's obligation to pay Premier was in fact contingent on Schein's sale

17 of the Premier products to a third party. Clearly, this is the result as a matter of existing practice" since

18 Schein "did not issue a purchase order for the products which Premier claims were sold during Premier's

19 fiscal third quarter, nor did Premier send an invoice to Henry Schein for these products, each of which

20 are standard business practices in our industry." Since the payments due from Schein were always

21

22 2Also, under International Accounting Standards which reinforce and supplement theGAAP provisions, with respect to the sale of goods, revenue should be recognized when:

23

241. The risks and rewards of ownership have passed to the buyer and the sellerretains no significant involvement to the degree usually associated with ownership.

25

2. No significant uncertainty exists as to:.26 a. The consideration to be received

27 b. The costs to be incurredc. The extent to which goods may be returned.

28

18

1 contingent on Schein's reselling the Premier products, Premier had no justification to record the $2.5

2 million in sales during the third fiscal quarter of 1998. Pursuant to GAAP, Premier should have deferred

3 recognition of revenue on such shipments, but did not in order to inflate its reported results.

4 52. Due to these accounting improprieties, Premier presented its financial results and

5 statements in a manner which violated GAAP, including the following fundamental accounting principles:

6 (a) The principle that interim financial reporting should be based upon the same

7 accounting principles and practices used to prepare annual financial statements was violated(APB No.

8 28 § 12);

9 (b) The principle that financial reporting should provide information that is useful to

10 present to potential investors and creditors and other users in making rational investment, credit and

11 similar decisions was violated (FASB Statement of Concepts No. 1, § 34);

12 (c) The principle that financial reporting should provide information about the

13 economic resources of an enterprise, the claims to those resources, and effects of transactions, events

14 and circumstances that change resources and claims to those resources was violated (FASB Statement

15 Concept No. 1, §40);

16 (d) The principle that financial reporting should provide information about how

17 management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for

18 the use of enterprise resources entrusted to it was violated. Furthermore, to the extent that management

19 offers securities of the enterprise to the public, it voluntarily accepts wider responsibility for accountabi-

20 lity to prospective investors and to the public in general (FASB Statement of Concepts No. 1, § 50);

21 (e) The principle that financial reporting should provide information about an

22 enterprise's financial performance during the period was violated. Investors and creditors often use

23 information about the past to help in assessing the prospects of an enterprise. Thus, although investment

24 credit decisions reflect investors' expectations about future enterprise performance, those expectations

25 are commonly based at least partly on evaluations of past enterprise performance (FASB Statement of

26 Concepts No. 1, § 42);

27

28

19

1 The principle that financial reporting should be reliable in that it represents what

2 it purports to represent was violated. The information should be reliable as well as relevant is a notion

3 that is central to accounting (FASB Statement of Concepts No. 2, § 58-59):

4 (g) The principle of completeness, which means that nothing is left out of the

5 information that may be necessary to insure that it validly represents underlying events and conditions

6 was violated (FASB Statement of Concepts No. 2, § 79); and

7 (h) The principle that conservatism be used as a prudent reaction to uncertainty to

8 try to ensure that uncertainties and risks inherent in business situations are adequately considered was

9 violated. The best way to avoid injury to investors is to try to ensure that what is reported represents

10 what it purports to represent (FASB Statement of Concepts No. 2, § 95, 97).

11 53. Further, the undisclosed adverse information concealed by defendants during the Class

12 Period is the type of information which, because of SEC regulations, regulations of the national stock

13 exchanges and customary business practice, is expected by investors and securities analysts to be

14 disclosed, and is known by corporate officials and their legal and financial advisors to be the type of

15 information which is expected to be, and must be disclosed.

16

17 PREMIER MANAGEMENT'S RESPONSIBILITY FOR,AND KNOWING FAILURE TO, IMPLEMENT AND MAINTAIN

18 ADEQUATE INTERNAL ACCOUNTING CONTROLS

19 54. Premier had a responsibility to maintain sufficient accounting controls to accurately report

20 its financial results. It is well settled that the representations made by a company in its financial

21 statements and in other financial disclosures to the public are the representations of that company's

22 management. Indeed, even when a company issues audited financial statements together with the report

23 of that company's independent auditors, that report always expressly provides that "the financial

24 statements are the responsibility of [the company's] management."

25 55. According to SEC rules, to accomplish the objectives of accurately recording, processing,

26 summarizing and reporting financial data, a company must establish an internal control structure.

27 Pursuant to §13(b)(2) of the Exchange Act, Premier was required to

28

20

1 [Mlake and keep books, records and accounts, which, in reasonable detail, accurately

2 and fairly reflect the transactions and dispositions of the assets of the issuer; and

3 (A) devise and maintain a system of internal accounting controls sufficient to

4 provide reasonable assurance that:

5 (i) -- transactions are executed in accordance with management's general or

6 specific authorization;

7 -- transactions are recorded as necessary (1) to permit preparation of financial

8 statements in conformity with generally accepted accounting principles. . .

9 56. Moreover, according to Appendix D to Statement on Auditing Standards No. 55

10 "Consideration of the Internal Control Structure in a Financial Statement Audit" ("SAS 55"),

11 management should consider, among other things, such objectives as (i) making certain that

12 "[t]ransactions are recorded as necessary... to permit preparation of financial statements in conformity

13 with generally accepted accounting principles... [and] to maintain accountability for assets," and (ii)

14 making certain that "Whe recorded accountability for assets is compared with the existing assets at

15 reasonable intervals and appropriate action is taken with respect to any differences."

16 57. As described in SAS 55, the applicability and importance of specific control environment

17 factors, accounting system methods and records, and control procedures that an entity should establish

18 should be considered within the context of such criteria as an entity's size, its organization and

19 ownership characteristics, the nature of its business, the diversity and complexity of its operations, the

20 entity's method of processing data, and its applicable legal and regulatory requirements. In short, the

21 larger the entity, the more the nature of the entity's business is complex, diverse and sophisticated, and

22 the public ownership of the entity customarily requires a sophisticated internal control structure to ensure

23 that transactions are accurately recorded and that, prior to the public disclosure of any financial

24 information, such transactions are compared to the existing assets to eliminate any discrepancies between

25 the recorded and actual accounts.

26 58. According to SAS 55:

27 Establishing and maintaining an internal control structure is an important management

28 responsibility. To provide reasonable assurance that an entity's objectives will be

21

1 achieved, the internal control structure should be under ongoing supervision by

2 management to determine that it is operating as intended and that it is modified as

3 appropriate for changes in conditions.

4 59. Contrary to the requirements of CiAAP and SEC rules, Premier failed to implement and

5 maintain an internal accounting control system. Since the third quarter of fiscal 1998, at the least,

6 Premier management knowingly tolerated the existence of inadequate internal controls and/or recklessly

7 disregarded its obligation to implement adequate controls to ensure that revenues were properly

8 recorded in compliance with GAAP, SEC rules, and the Company's own revenue recognition policy.

9

10 NO SAFE HARBOR

11 60. The statutory safe harbor provided for forward-looking statements under certain

12 circumstances does not apply to any of the allegedly false statements pleaded in this complaint. The

13 specific statements pleaded herein were not identified as "forward-looking statements" when made. Nor

14 was it stated with respect to any of the statements forming the basis of this complaint that actual results

15 "could differ materially from those projected." To the extent there were any forward-looking statements,

16 there were no meaningful cautionary statements identifying important factors that could cause actual

17 results to differ materially from those in the purportedly forward-looking statements. Alternatively, to

18 the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein,

19 defendants are liable for those false forward-looking statements because at the time each of those

20 forward-looking statements was made, the particular speaker knew that the particular forward-looking

21 statement was false, and/or the forward-looking statement was authorized and/or approved by an

22 executive officer of Premier who knew that those statements were false when made.

23 //

24 //

25 //

26

27

28

22

1 APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD-ON-THE-MARKET DOCTRINE

2

3 61. At all relevant times, the market for Premier stock and options was an efficient market

4 for the following reasons, among others:

5 (a) Premier common stock met the requirements for listing, and were listed and

6 actively traded on the NASDAQ, a highly efficient and automated market;

7 (b) As a regulated issuer, Premier ffied periodic public reports with the SEC and the

8 NASDAQ;

9 (c) Premier regularly communicated with public investors via established market

10 communication mechanisms, including through regular disseminations of press releases on the national

11 circuits of major newswire services and through other wide-ranging public disclosures, such as

12 communications with the financial press and other similar reporting services; and

13 (d) Premier was followed by several securities analysts employed by major brokerage

14 firms who wrote reports which were distributed to the sales force and certain customers of their

15 respective brokerage firms. Each of these reports was publicly available and entered the public

16 marketplace.

17 62. As a result, the market for Premier common stock and options promptly digested current

18 information regarding Premier from all publicly available sources and reflected such information in

19 Premier's stock price. Under these circumstances, all purchasers of Premier stock during the Class

20 Period suffered similar injury through their purchase of shares and/or options at artificially inflated prices

21 and a presumption of reliance applies.

22

23 FIRST CLAIM FOR RELIEF FORVIOLATION OF SECTION 10(b) OF THE

24 EXCHANGE ACT AND SEC RULE 10b-5

25 63. Plaintiff repeats and realleges each and every allegation contained in paragraphs 1 through

26 62 of the Complaint as if fully set forth herein.

27 64. During the Class Period, the defendants engaged in a course of conduct, described above,

28 pursuant to which they knowingly or recklessly engaged in acts, transactions, practices, and a course of

23

1 business which operated as a fraud upon plaintiff and the other members of the Class; made various

2 untrue statements of material facts and omitted to state material facts necessary to make statements

3 made, in light of the circumstances under which they were made, not misleading to plaintiff and the other

4 Class members; and employed manipulative and deceptive devices and contrivances in connection with

5 the purchase of Premier securities.

6 65. The purpose and effect of the defendants' plan, scheme, conspiracy and course of conduct

7 was to artificially inflate the price of Premier common stock and then artificially maintain the market

8 price of the stock.

9 66. The Individual Defendants, through their positions as directors and officers of the

10 Company, had actual knowledge of the material omissions and/or the falsity of the statements set forth

11 above, and intended to deceive plaintiff and the other members of the Class or, in the alternative, acted

12 with reckless disregard for the truth when they failed or refused to ascertain and disclose in the

13 aforementioned documents the true facts to plaintiff and the other members of the Class.

14 67. Defendants Premier and the Individual Defendants had actual knowledge of the material

15 omissions and/or the falsity of the statements set forth above, and intended to deceive plaintiff and the

16 other members of the Class or, in the alternative, acted with reckless disregard for the truth when it failed

17 or refused to ascertain and disclose in the aforementioned documents the true facts to plaintiff and the

18 other members of the Class.

19 68. As a result of the foregoing, the market price of Premier stock was artificially inflated

20 during the Class Period. In ignorance of the materially false and misleading nature of the misrepresen-

21 tations, described above, made by defendants and the deceptive and manipulative devices and

22 contrivances employed by the defendants, plaintiff and the other members of the Class relied, to their

23 detriment, on the integrity of the market price of the stock in purchasing Premier stock. Had plaintiff

24 and the other members of the Class known of the material adverse information not disclosed by the

25 defendants, they would not have purchased Premier stock at the artificially inflated prices that they did.

26 69. Plaintiff and the other members of the Class have relied on the materially false and

27 misleading statements issued by Premier, and have suffered substantial damages as a result of the wrongs

28 alleged herein.

24

1 70. By reason of the foregoing, defendants have violated Section 10(b) of the Exchange Act

2 and Rule 10b-5 promulgated thereunder, in that they: (a) employed devices, schemes and artifices to de-

3 fraud; (b) made untrue statements of material fact or omitted to state material facts necessary to make

4 the statements made not misleading; and (c) engaged in acts, practices and a course of business which

5 operated as a fraud or deceit upon plaintiff and the other members of the Class in connection with their

6 purchases of Premier stock during the Class Period.

7

8 SECOND CLAIM FOR RELIEF FOR VIOLATIONOF SECTION 20(a) OF THE EXCHANGE ACT

9

10 71. Plaintiff repeats and realleges each and every allegation set forth in paragraphs 1 through

11 70, as if set forth fully herein.

12 72. The Individual Defendants, by virtue of their offices, directorships, and specific acts was,

13 at the time of the wrongs alleged herein, are controlling persons of Premier within the meaning of

14 Section 20(a) of the Exchange Act. The Individual Defendants had the power and influence and

15 exercised the same to cause Premier to engage in the illegal conduct and practices complained of herein

16 by causing the Company to disseminate to the public, or through analysts, the materially false and

17 misleading information referred above.

18 73. The Individual Defendants' positions made them privy to and provided them with actual

19 knowledge of the material facts concealed from plaintiff and the Class by Premier during the Class

20 Period.

21 74. By reason of the conduct alleged in the First Claim for Relief, the Individual Defendants

22 are liable for the aforesaid wrongful conduct and is liable to the plaintiff and the members of the Class

23 for the substantial damages which they suffered in connection with their purchases of Premier common

24 stock during the Class Period.

25 WHEREFORE, plaintiff on his own behalf, and on behalf of the other members of the Class, pray

26 for judgment as follows:

27 1. Declaring this action to be a proper class action, certifying the plaintiff as Class

28 representatives and his counsel as Class Counsel;

25

1 2. Declaring and determining that the defendants violated the federal securities laws by

2 reason of their conduct as alleged herein;

3 3. Awarding money damages against the defendants, jointly and severally, in favor of the

4 plaintiff and the other members of the Class for all losses and injuries suffered as a

5 result of the acts and transactions complained of herein, together with prejudgment

6 interest on all of the aforesaid damages which the Court shall award from the date of

7 said wrongs to the date of judgment herein at a rate the Court shall fix;

8 4. Awarding plaintiff his costs and expenses incurred in this action, including reasonable

9 attorneys', accountants' and experts' fees; and

10 5. Awarding such other relief as may be just and proper.

11

12 DEMAND FOR JURY TRIAL

13 Plaintiff hereby demands a trial by jury.

14

15 Dated: May 1, 1998 Michael D. BraunSTULL, STULL & BRODY

16

17 ikBy: „v

18 Mic ae D. Braun10940 Wilshire : ou evard

19 Suite 2300Los Angeles, CA 90024

20 (310) 209-2468

21 Jules BrodyMichael Swick

22 STULL, STULL & BRODY6 East 45th Street

23 New York, New York 10017(212) 687-7230

24Attorneys for Plaintiffs

25

26

27

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26

CERTIFICATION

Dr. Robert Valenti, certifies under penalty of perjury, as follows:

1. I am the plaintiff in the within complaint.

2. I have read the foregoing complaint and authorize its

filing.

3. I did not purchase the security that is subject of the

complaint at the direction of plaintiff's counsel or in order to

participate in any private action arising under the federal

securities laws.

4. I am willing to serve as a representative on behalf of

the class, including providing testimony at depositions and trial,

if necessary.

5. Following are all of my transactions in the security that

is the subject of the complaint during the class period specified

in the complaint (January 6,1998 to April 15, 1998):

Purchase: 400 shares of Premier Laser Systems, Inc.

common stock on .Z--/7-4,7", 1998 at $ 71: per share.

6. I have not filed any other cases under the Title under

which this action was brought in which I sought to serve or served

as a representative party on behalf of a class, during the 3-year

period preceding the date on which this certification was signed .

7. I will not accept any payment for serving as a represen-

tative party on behalf for a class beyond the my pro rata share of

any recovery, except as ordered or approved by the court.

CERTIFIED, UNDER PENALTY OF PERJURY at /4"4•4= r CA/ e-r r.c,4 ,

New York, this day of April, 1998.

,--A

Dr. Robert Valenti